Former Greenwich man at center of provacative book on high-frequency trading

Tim Loh

Published 1:00 am, Sunday, April 6, 2014

GREENWICH -- There's a passage in Chapter 3 of "Flash Boys," the latest book by best-selling author Michael Lewis, in which Ronan Ryan, one of the story's handful of unlikely heroes, recalls coming to America.

In 1990, the Irish government sent his father to New York to recruit businesses. His dad stretched the family budget by renting a home in Greenwich. Ryan, 16 at the time, was gobsmacked by what he saw.

"The kids had their own cars at 16!" he recounts. "Kids would complain they had to ride on a school bus. I'd say, `This (expletive) thing actually takes you to school! And it's free! I used to walk three miles.' It's hard not to love America.' "

This past week, Ryan and a few others at the heart of "Flash Boys" generated lots of emotion across America -- not all of it love. Their several-year odyssey around Wall Street is traced by Lewis, who levels a frontal attack on the practice of high-frequency trading -- in which increasingly complex computer algorithms are used for lightning-quick games of stock-picking in pursuit of slivers of profits that add up big.

"Flash Boys" makes periodic stops in Fairfield County, as Ryan and others question, investigate and attempt to counteract the advantages of high-frequency traders -- portrayed here as market nuisances.

Ultimately, the group of them leave Royal Bank of Canada and start their own electronic exchange, IEX, which launched last October and claims to protect everyday investors from high-frequency traders.

Big debate

In a provocative splash, Lewis appeared on TV news magazine "60 Minutes" last Sunday and declared, "The United States stock market, the most iconic stock market in global capitalism, is rigged." The appearance and book have rekindled -- and broadened -- a debate over high-frequency trading that's existed on Wall Street for years.

"The stock market isn't rigged and IEX hasn't yet generated a lot of interest," Clifford Asness, managing and founding principal of Greenwich-based hedge fund firm AQR Capital, wrote in the Wall Street Journal on Wednesday. The piece was co-authored by Michael Mendelson, a principal and portfolio manager at AQR. "In our profession, what we saw on `60 Minutes' is called `talking your book,' " they quipped. "In Mr. Lewis' case, literally."

" `Flash Boys' is an illuminating and entertaining book about a topic that has been much discussed and little understood," he wrote. "Electronic trading, on balance, has brought huge benefits to the capital markets in that it has overall reduced the cost of trading, eliminated costly errors and increased efficiency. But that is not to say that there are no problems. There are, and they can and should be fixed."

Jury's out

Boiled down, the argument against high-frequency trading is this: Obsessed with speed, its practitioners get clued into what investors intend to buy, race ahead to other exchanges and obtain the security first, before selling it back at a slightly higher price. It's possible, in part, because the stock market has evolved from physical trading floor in Lower Manhattan to over 60 public and private exchanges located in data centers across northern New Jersey.

The question, then, is whether such traders increase or decrease market liquidity, and whether they increase or reduce the costs of transactions.

"How do we feel about high-frequency trading? We think it helps us," Asness wrote in the WSJ. After much "quantitative and qualitative analysis," he said, AQR has concluded that "on the whole high-frequency traders have lowered costs." Hearst Connecticut left a message at AQR this past week seeking additional comment.

Peterffy, however, argued that such traders get in the way, posting bids and offers in competition with true market makers.

"When the trade looks good, in view of all market information received in the last few milliseconds, they trade ahead of them and when it looks bad, they cancel their orders so that the market makers end up with the bad trade," he wrote. "As a result of this, market makers who are willing to assume risk are disenfranchised and leave the business and the markets become less liquid."

Keeping up

Keith McCullough, CEO of Hedgeye Risk Management in Stamford, who was a manager at several hedge funds in the last decade, is dismissive of Lewis' book -- and anyone who characterizes high-frequency trading as inherently bad.

The trouble, he says, is if high-frequency traders can obtain market information unavailable to everyone else -- by striking deals with exchanges, for example, which give them early snapshots of market activity. Still, he thinks too much of the debate is centered around speed.

"It's like sports, it's like, `Oh that guy is using a graphite hockey stick, which hits the puck X miles-an-hour faster. Maybe I should stay with my wooden hockey stick? No, I'm going to get a graphite one and then be better,' " he says.

One Fairfield County resident, a former head of global trading at a prominent money management firm, recalls the pressure he was under last decade to keep up with the growing speed of trading.

"We hired guys with backgrounds from very sophisticated sciences, particle physicists, some of the smartest math brains you can possibly pull out of the best shops," he says. "We built a quant lab that was basically like an air-traffic control center to actually monitor the electronic trading activity in various securities that we had an interest in."

Market forces

However the debate plays out, Mark C. Reed will remember the excitement of watching "60 Minutes" last Sunday. The senior VP for administration and chief of staff at Fairfield University recognized a familiar face.

In 1996, he had graduated from Fairfield University -- alongside Ronan Ryan, whom he remembers vividly.

"Ronan, as you know, is Irish, and of course we enjoyed listening to his Irish accent," Reed said. He was "definitely the kind of guy you enjoyed being around because he was nice and welcoming to all."

Hearst Connecticut left a message with IEX seeking comment from Ryan this past week.

On Thursday, Peterffy's Interactive Brokers announced it would begin connecting with the new exchange. "Customer interest in IEX as a result of recent media exposure is apparent," the release said. "We determined that it makes sense to connect directly to this new trading venue, thereby providing our customers with another market center destination."

That, at least, will put a smile on the Fairfield University community.

"Good things happen to good people," Reed said of his old classmate. "Gives me, and others I'm sure, pride in Fairfield University and our fellow alumni."